Wiping the Floor Under Mortality Improvements Brings Major Accounting, Cash and Actuarial Benefits in 2017

• The floor under mortality rate improvements typically adds more than 5% to pension liabilities.
• Wiping the floor will bring major cash flow, P/L and balance sheet benefits and should be a 2017 accounts issue.  Even a reduction is worthwhile.
• The case for the floor is thin.  It imposes an arbitrary minimum increase above the improvement tables.  It only impacts materially on cash payments over 25 years ahead and with negative long term real yields, this distorts the cost of the tail.
• Since 2011 mortality improvements have “fallen off a cliff”, except for the most affluent.  The actuarial consensus is that it is not a ‘blip’.
• Make the floor related payments a bullet at the end of the actuarial recovery plan.  Payment is contingent on a recount incorporating experience during the recovery period.
• The recovery plan becomes deliberately back-end loaded.  If necessary add a bank/insurance payment guarantee.  Risk is diversified making both members and sponsor better off.

Indicative Calculation

​​The balance sheet improves by £50 million pre-deferred tax.  The P & L benefits by £50 million x the discount rate of a double A corporate bond.